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Similar to the debate over NAFTA (whose opponents
ranged from the corporate-bashing Ralph Nader to the
nationalist conservative Pat Buchanan to the populist
Ross Perot), the current storm over outsourcing displays
an odd collection of bedfellows. Democrats and
Republicans joined the chorus of critical reaction to the
February statement of N. Gregory Mankiw that
outsourcing is ultimately beneficial to the American
economy. Senator John Edwards fumed that Mankiw’s
comments betrayed an “incredible indifference” to the
plight of American workers, while Speaker of the House
Dennis Hastert declared that Mankiw’s claim “fails a
basic test of real economics”. Paul Craig Roberts, the
intellectual godfather of supply side economics during
the Reagan era, warned that the outsourcing of whitecollar jobs threatens to transform the U.S. into a Third
World country within twenty years. Echoing Roberts’
fears, the liberal New York Senator Charles Schumer
opined that the outsourcing of computer programming,
radiology, and other professional occupations to India
and China represents a palpable danger to the American
economy demanding a reexamination of Ricardian-style
theories of comparative advantage.
Most of these popular claims about outsourcing fail to
withstand analytical scrutiny. The standard economic
argument for outsourcing—that the transfer of internal
functions to external agents possessing major cost
advantages and/or specialized skills serves to release
corporate resources for deployment in value-creating
activities—enjoys broad empirical support. The Institute
for International Economics estimates that outsourcing
boosted annual U.S. productivity growth from 2.5 to 2.8
percent between 1995 and 2002, generating a marginal
GDP expansion of $230 billion. While the specific
contribution of the Information Technology Revolution is
difficult to ascertain with precision, few experts doubt
that the sharply lowered costs and greatly increased
availability of IT products and services played a central
role in the productivity gains of the American economy
during the 1990s.
Moreover, available data indicate that the IT outsourcing
phenomenon is less dramatic than commonly supposed:
• Forrester Research’s often-cited 2002 report predicts
that the U.S. will lose 3.3 million jobs to foreign
outsourcing through 2015. In this scenario, the average
annual job loss would amount to 220,000—quite small
given the size of the American labor market. Moreover,
the IT component of Forrester’s projected outsourcing
(500,000 jobs, or roughly 33,000 a year over a fifteen
year horizon) is modest compared total employment in
that sector (2.35 million software programmers in 2003,
a modest increase from 2002).
• While international hourly wage differentials for IT
professionals are substantial ($18 for a senior
programmer in China versus $66 in the U.S.), the net
cost savings resulting from outsourcing are lower than a
literal wage comparison would suggest. Accounting for
training and other transaction costs, Meta Group
estimates that actual cost savings of software
outsourcing fall in the range of 15-20 percent—below the
minimum hurdle rate of many American multinationals.
The nature of the current outsourcing wave (which
affects software programming, financial services,
medical diagnostics, and other professional activities as
well as back office functions) raises legitimate concerns
about the fate of high-wage skilled occupations in the
United States. But anecdotal evidence suggests
considerable room for upward migration in America’s
high-tech value chain. The publicity attending the
January release of internal documents revealing IBM’s
intention to outsource software programming to India
obscures the company’s announced plan to raise total
U.S. employment by 5000 positions, many of which will
be filled by programmers writing highly specialized code
for life science applications.
These observations are of little consolation to
unemployed IT professionals, who are venting their fury
in prominent business journals. Typical is a letter in the
February 18 issue of Fortune by a reader who castigated
the magazine for dismissing the human consequences
of outsourcing and vowed that angry white-collar
workers will defend their jobs with votes—illustrating the
widening chasm between the politics of labor market
dislocations and the economic realities of globalization.